Question

Q6: The government uses two programs that affect the market for Chinese liquor (“Baijiu”). Media campaigns and labeling requirements are aimed at making the public aware of the dangers of drinking alcohol. At the same time, the Department of Agriculture maintains a price support program for grains (primary inputs of “Baijiu”), which raises the price of grains above the equilibrium price. a. How do these two programs affect alcohol consumption? Use a graph of the Chinese liquor market in your answer. b. What is the combined effect of these two programs on the price of “Baijiu”? c. The Chinese liquors are also heavily taxed. What effect does this tax have on consumption?

Answer 1

A) Increasing labelling requirements and campaigns to make people aware of the dangers of alcohol will help reduce demand for labor

On the other hand, increasing cost of grains to producers would make them respond by reducing production, thereby reducing suppy of liquor in the market

Net effect: Demand curve shifts left and supply curve shifts left

- Price (in) 0 QQ Quantity demanded and supplied (in units)

As it can be seen, price remains more or less unchanged, wholly total output of liquor sold declines

B) Combined effect on price depends on the magnitude of shift of demand and supply curves.

If shifts are equal, then price is unchanged

If shift in demand > shift in supply then price falls

If shift in demand < Shift in supply then price rises

C)

Consumption of liquor will fall heavily after tax, as tax increases price paid by consumers, thereby reducing demand.